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How paying the principal affects your car loan Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our aim is to assist you make better financial choices by providing you with interactive tools and financial calculators, publishing original and objective content. This allows you to conduct your own research and compare data for free to help you make financial decisions with confidence. Bankrate has partnerships with issuers, including but not restricted to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Profit The products that appear on this website are provided by companies that pay us. This compensation may impact how and where products appear on this website, for example for instance, the order in which they be displayed within the listing categories in the event that they are not permitted by law for our mortgage, home equity and other home loan products. This compensation, however, does affect the information we publish, or the reviews that you see on this site. We do not cover the vast array of companies or financial deals that may be accessible to you.
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3 min read published September 27 2022
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Repaying the principal amount on your car loan is a great option to rapidly increase the equity in your car. In most cases, you must indicate to the lender that the payment is intended to only go to the principal. This can be done via the internet or by phone. Each lender has its own process but not all accept principal-only payments. What is a principal-only vehicle payment? A principal-only car loan is a type of payment that goes exclusively towards the balance principal of the loan and is distinct from your regular monthly payments. The principal is the amount that you initially borrowed, without any additional interest. The aim of this extra payment is to accelerate your repayment of the loan. Each and every payment you make that is solely toward your principal builds equity in your car. When you accumulate equity in your vehicle you are closer to owning the car outright. Also, it reduces the possibility of owing more than your vehicle is worth. This is also called being on the loan. How to pay down the principal on the car loan The principal-only option on your car is a great option to pay down your balance faster. Although it’s not the same with all lenders, you’ll likely have to notify the lender that this payment is made to pay the principal amount only, and not an early payment of the next installment. Contact your lender to determine whether they allow this kind of payment and how you can proceed to make it. If you lender doesn’t allow you to make a principal-only payment, you may still be able to pay your loan more quickly. How can you pay off your car loan faster If you can’t make principal-only payments, you may be able to still get rid of your auto loan . Be sure to ensure that your lender isn’t charging before making additional payments. Schedule biweekly payments: You may not have enough funds to pay a full amount every month, but one half-payment every other week could reduce the overall interest paid depending on the way it’s calculated. This only works out when it’s an interest rate that is precomputed, since it will be calculated the same regardless of the time when payments are made. Pay a little more than the minimum amount every month: Contact your lender to find out whether they allow this kind of payment and how to go about making one. Every bit of extra money helps in paying down the loan faster. Pay extra lump-sum installments when you receive an extra bonus or tax refund, you can put it towards your vehicle loan in the event that it is better spent elsewhere. How the principal amount on an auto loan can affect your credit rating Paying down a car loan could seem like a good idea initially. But paying down your loan quickly, particularly in the short term, can . In the short run your score might decrease by a few points, but in the long term, it could improve if you have high ratio of debt to income. Other factors, including your credit mix and payment history, may influence your score. To determine whether you should pay on your auto loan early is right for you, take a look at the following: Your credit profile: Paying your auto loan off early shows lenders you are able to manage your debt well. But your credit score — the variety of credit accounts you have including credit cards, a car loan as well as credit cards and more — may be affected when the car loan is your sole installment loan. Your payment history: Paying off a car loan earlier reduces the amount of regular payments, but it’s not as significant of an impact on your credit score as revolving debt. Your ratio of debt-to income: Your debt-to earnings ratio is another crucial factor that considers how much debt you owe compared to your earnings. Paying down a car loan may increase your DTI ratio and help to improve your credit score over time. How can you lower your monthly car payments If you’re looking to get a principal-only loan, it will not help, as it won’t lower your minimum monthly payment. But, there are few ways to lower your monthly car payment. Refinance If your credit is improving or you can find an interest rate that is better could aid in paying off the loan faster. If you decide to refinance your car loan you get an entirely new loan with another lender to pay your present loan off. This means it’s important to shop around and find the most affordable deal to lower the overall cost of your loan and monthly payments. Modify your loan You can also talk to your current lender about . Your lender may be willing to alter the conditions that apply to the loan so that you can make monthly payments affordable. One method to accomplish this is by extending your loan duration. But doing so will mean paying more interest over the long term. Trade or sell your car Another option to reduce the cost of your loan is to move into a less expensive car. Trade in your current car as well as selling the vehicle privately could help you get the money you need to make a down payment. From there you can find the right car to fit your budget and search to find the most suitable auto loan available. The final point is that paying down the principal amount on your car loan can be a good option to build equity. If your lender accepts extra principal installments, then you are able to make one anytime you want. Learn more
This article was written using automation technology and thoroughly checked for accuracy and editing by an editor from our editorial team.
Edited by Rhys Subitch Edited by Auto loans editor
Rhys has been editing and writing for Bankrate since late 2021. They are passionate about helping readers feel confident to control their finances with concise, well-studied and well-researched content that breaks down complicated topics into manageable bites.
Auto loans editor
Reviewed by Mark Kantrowtziz Reviewed by Nationally recognized student financial aid expert
Mark Kantrowitz is an expert on student financial aid, the FAFSA and scholarships, 529 plans educational tax benefits, student loans.
Nationally acknowledged expert in student financial aid
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